Paper shuffle allows for vast supply of easy money

The state was delivering more water than ever to its customers, and in Kern County some of those customers sold some of it back, through a simple trade, at a higher price.

Tens of millions of dollars in sales to the "environmental water account" were little more than paper shuffles. It was all perfectly legal.

But the environment lost while Kern County water agencies collected $138 million in sales to the program, the vast majority of which was paid for with the proceeds from taxpayer backed environment and water bonds.

Public water agencies in Kern County used money from sales to an environmental water account to fund an employee retirement plan, buy land and pay for miscellaneous repairs, documents and interviews show.

One document shows that the Kern County Water Agency used revenue from the sales to help finance a lawsuit against the Department of Water Resources — the same agency that wrote the taxpayer-backed check to the agency — to lower its water bills.

The head of the Kern County Water Agency, James Beck, denied the lawsuit was funded with the sales revenue, but he could not explain why the general manager of one of his agency's member districts recounted that version of events to his board of directors.

Beck said revenues from the sales were used to cover the cost districts paid to buy, store and deliver the water. He also said funds were set aside to cover the cost of future purchases to replace water that was sold.

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But documents and interviews show the sales were seen by the water agency's "member units," at least in some cases, as a source of revenue that could be used for a wide variety of purposes:

In 2003, the Buena Vista Water Storage District, based in Buttonwillow, put $500,000 in revenues from the environmental water account sales into its employee retirement plan, documents show.

Water districts put environmental water account revenues into their coffers to offset miscellaneous repairs and other costs in order to keep customers' water bills down, said Dennis Atkinson, general manager of the Tejon Castaic Water District. "We take that money and apply it against our bills," Atkinson said.

One district participated only marginally — selling small amounts of water at a relatively low price to the account's precursor one year and participating as a partner to help other water districts complete their sales in another. The Rosedale-Rio Bravo Water Storage District, based in Bakersfield, still was able to buy land to expand its groundwater storage capacity and build facilities with the proceeds, said general manager Eric Averett. Increasing the groundwater banking capacity is arguably consistent with managing water for the account, although the district did not sell any water to the account after 2001.

MediaNews identified $8.6 million worth of checks, refunds and credits, presumably to offset water purchases and pumping costs, including more than $3 million to Paramount Farms, that were paid to landowners in public water districts that sold to the water account. Blackwell Land LLC also received more than $3 million in refunds from the sales, while the remainder went to fewer than 10 other private landowners.

In 2003, Westside Mutual Water Company and the Wheeler Ridge-Maricopa Water Storage District negotiated a $600,000 payment to the water company, controlled by Beverly Hills billionaire Stewart Resnick, after a change in circumstances shifted a portion of the sales from Westside Mutual to the water district. At a meeting of sellers to the account, there was "a plea from Westside MWC that some compromise be worked out to adjust for the windfall" to the Wheeler Ridge-Maricopa district, which gained a greater share of the sales at Westside's expense, according to a memorandum from the water district's general manager, William Taube.

Wheeler Ridge, which serves water to about 90,000 acres of farmland south of Bakersfield, shifted $600,000 in sales to Westside Mutual, which still left the district with $1.4 million in "net revenue."

The most unusual use of environmental water account money may have been its apparent use to sue the state Department of Water Resources — the agency that wrote the check for the purchases — to lower Kern County's water bills.

Beck denied that happened, but that is what Taube told his board of directors in May 2007.

In an interview, Taube said that while it was possible he was mistaken, the point he made was that Kern's "member units" would not have to contribute attorneys' fees because enough revenue had been generated from the water sales.

The lawsuit, known as the "Hyatt-Thermalito litigation," is a dispute over how the state prices power from turbines at Lake Oroville. Kern County Water Agency and other water districts north of the Tehachapis, including Bay Area districts, want the prices to reflect market rates, which would increase the cost of water in Southern California — where it takes more electricity to deliver Delta water because of the greater distance and the need to pump the water over the Tehachapis.

The power sales are applied to contractors' debt for the State Water Project's dams, pumps and aqueducts, so raising the price of the electricity would reduce debt for contractors north of the Tehachapis at Southern California's expense.

In May 2007, Taube told his board that at the Kern agency's April board meeting he attended, the Kern board "directed that 2007 EWA sale proceeds accruing to the Agency would be used to fund the Hyatt-Thermalito litigation. This will reduce the litigation cost borne by Member Units and delay the time when Member Unit contributions to this litigation will be necessary," according to minutes of the Wheeler Ridge-Maricopa district's meeting.

Beck said that was incorrect but did not offer an explanation for how a misunderstanding might have occurred.

Asked to clarify what his understanding was at the time, Taube said it was that, "They weren't going to need to call on member units ... because of the EWA."

Department of Water Resources Director Lester Snow, through a spokesman, declined to comment on the possibility that the proceeds from taxpayer-financed water sales to his agency may have been used to sue his agency.

In response to a formal request under the state Public Records Act, the Kern agency said it had no records showing environmental water account revenues being used to pay for lawyers. The official minutes of the Kern agency's April 2007 meeting contain no mention of the Hyatt-Thermalito lawsuit and its meetings are not recorded.